In this section, we provide an application of how to use GARCH techniques in a
simplified approach to estimate a portfolio’s VaR. We will show that the use of
historical returns of portfolio components and current weights can produce accurate
estimates of current risk for a portfolio of traded securities. Information on the
time series properties of returns of the portfolio components is transformed into a
conditional estimate of current portfolio volatility without needing to use complex
time series procedures. Stress testing and correlation stability are discussed in this
framework.
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